The developing Silicon Valley Bank story kept markets hostage and determined today’s reaction to the latest US payrolls release. Yesterday’s surprise announcement by SVB that it wanted to raise $2.25bn by issuing shares to strengthen its capital position triggered a strong risk-off move. SVB is considered a (one of the first) victim(s) of central bank’s aggressive tightening campaigns following decades of ultra-easy monetary policy. Lack of deposits triggered forced asset sales of eg US Treasuries at steep losses. The story triggered a bank run on SVB and raises questions on broader financial stability as Fed policy becomes restrictive with a deeply inverse yield curve. Global core bonds stuck to yesterday’s gains (US Treasuries) or made a catch-up move (German Bunds). European stock markets follow WS and Asia south with losses of up to 2%. The specific (US) nature of the current problems hampers the greenback’s normal outperformance in such risk-off market setting.
The above-mentioned story helps explain the market reaction the US payrolls. The US economy added another 311k jobs in February, significantly beating 225k consensus, even when taking into account a 34k downward revision to the previous two months’ numbers. The second consecutive blowout numbers (504k in January) would have already cemented a 50 bps Fed rate hike in March if it weren’t for the developing SVB story. Now, markets focused on parts of the report which fell shy of expectations. The unemployment rate for example ticked up from 3.4% to 3.6% though we add a rise in the participation rate from 62.4% to 62.5%. Average weekly hours declined from 34.6 to 34.5. Average hourly earnings decelerated from 0.3% M/M to 0.2% M/M (vs 0.3% expected) while rising from 4.4% Y/Y to 4.6% Y/Y (vs 4.7% expected). Markets picked up on those elements, together with the financial stability concerns scaling back rate hike bets for March to 25 bps. US yields lose another 11.3 bps (30-yr) to 22.5 bps (2-yr). German yields fall by 15.9 bps (30-yr) to 24.5 bps (2-yr). US stock markets open up to 1.5% weaker. EUR/USD spikes from 1.06 to 1.0650.
Czech inflation slowed in February to 0.6% M/M and 16.7%Y/Y, compared to 6.0% M/M and 17.5% Y/Y in January. The outcome was marginally higher than market expectations and the forecast of the Czech national bank (16.5% Y/Y). Prices of goods in total went up by 0.5% and services prices by 0.6%. Core inflation (CNB reporting) printed at 12.1%. There were significant price hikes in food led by vegetables and fruit (+12.7%). Prices of households goods, appliances and household equipment (+1.4%) also rose substantially. As expected, fuel prices rose slightly in February, while inflation in the key housing section started to recede slowly. Imputed rents continued to fall (-0.7% M/M). Gas prices fell slightly (-1.6%). The data was no big surprise. KBC expects inflation to subside in coming months, mainly due to lower energy prices. Food price will decline more slowly. Core inflation (excluding imputed rent) will be more persistent. KBC expects inflation to stay in double digits in H1 of 2023 an may average about 11.0% for the whole year. The Czech koruna today lost modest ground (EUR/CZK 23.63) but this was mainly due to the broader risk-off sentiment rather than to country-specific topics.
The Canadian economy added 21 800 jobs in February. This compares with an outsized employment gain of 150 k in January. Still the figure was stronger than expected. The unemployment rate held near a record low at 5%. The participation rate stabilized at 65.7%. The hourly wage of permanent employees rose to a stronger than expected 5.4% Y/Y from 4.5% in January. The report comes as the Bank of Canada this week shifted to a pause in its rate hike cycle, leaving the policy rate unchanged at 4.50%. However, the BoC indicated that it remains prepared to increase the policy rate further if needed to return inflation to the 2% target. A tight labour market in this respect is an important factor. The Canadian dollar strengthened substantially from USD/CAD 1.383 to currently 1.378 after the release of the labour report. However, this was probably mainly inspired by the market reaction to the US payrolls released at the same time, rather than to the Canada data.